Why Vitesse Picked Multilink
The companies announced the $23 million all-stock deal Tuesday (see Vitesse to Buy Multilink). Multilink sells 10-Gbit/s electrical transceivers targeted at metro networks, and Vitesse plans to apply the technology to system backplanes. As part of the deal, 45 Multilink employees are to join Vitesse.
It's not an expensive deal. The 4.2 million shares amounts to a 2 percent dilution of Vitesse's stock, according to a report from analyst Jeremy Bunting of Thomas Weisel Partners. Still, why didn't Vitesse buy something cheaper, given that several startups are working on 10-Gbit/s signal technology?
"A lot of the startups, they have a lot of people and they don't have a revenue stream," says Tomasetta. "Our goal is to get to break-even by December, so we're not even interested in talking to anyone that can't pay for themselves."
Multilink's revenues are paltry -- less than $1 million for the March quarter -- but that's plenty, Tomasetta says. "There's even enough to pay for the 45 engineers who are coming over."
Assuming Multilink maintains $1 million in revenues per quarter, it would clear about $89,000 per head, per year, divided among the 45 new employees. Granted, such back-of-the-envelope math ignores an assortment of merger costs, not to mention rent.
The deal germinated months ago when Multilink was shopping itself around -- not surprising, given its struggles in the market. Tomasetta considered it and eventually dealt directly with Multilink CEO Rich Nottenburg. "It saved us a lot of money, because neither one of us used investment bankers," Tomasetta quips.
Backplane transceivers are a comfortable expansion option for Vitesse, because the company already sells into that market. That makes Multilink less radical than Vitesse's venture into network processors and related chips, involving startups acquired in 2000 and subsequently nullified in last year's company makeover (see Vitesse Drops Some Packets).
Even though Vitesse has the technology, to develop products comparable to Multilink's would have cost "$2 million to $3 million just for mask sets, first wafers, test cards -- all that expense you have to do for every product," Tomasetta says. And that doesn't include the engineering talent Vitesse would probably have to hire, since its data communications folks are all occupied with the company's new storage business.
Thomas Weisel's Bunting likes the deal, and he sees an outside chance for it to benefit Vitesse's long-haul business. "We believe Multilink still carries with it OC192 design wins at Cisco, Alcatel, Ciena, and Lucent, to name a few. Should these OEMs begin reordering Sonet transceivers, Vitesse’s long-haul business could see some unanticipated growth," he writes.
The catch is that the backplane market is crowded. Bunting lists six public companies chasing the market: Agere Systems (NYSE: AGR.A), Applied Micro Circuits Corp. (AMCC) (Nasdaq: AMCC), Broadcom Corp. (Nasdaq: BRCM), Intel Corp. (Nasdaq: INTC), Marvell Technology Group Ltd. (Nasdaq: MRVL), and PMC-Sierra Inc. (Nasdaq: PMCS). Private firms Accelerant Networks Inc., BitBlitz Communications Inc., and Velio Communications Inc. are in there as well.
Still, Tomasetta says backplanes will be "a nice second market" for Vitesse. "This was a way to triple our investment in that market without spending any money."
— Craig Matsumoto, Senior Editor, Light Reading